Arbitration Reform in India:
A Look at the Hong Kong Model

Introduction

The Indian Government (“Government”) led by Prime Minister Narendra Modi, has embarked on a mission to significantly enhance foreign investment in India and to greatly improve the ease of doing business in the country. To this end, the Government has promised judicial reforms and is considering amendments to India’s arbitration legislation. If the Government is keen on transforming India into a global arbitration hub, it can draw from the experience of Hong Kong, which is a successful model for arbitration in Asia Pacific. By establishing itself as Asia’s first international arbitration hub, Hong Kong has built a state of the art arbitral framework which includes modern arbitration legislation, a pro-arbitration judiciary, a reputed arbitral institution and a vibrant arbitration community. Since the Government’s declaration that arbitral awards rendered in China (including Hong Kong) would be recognised in India, an increasing number of Indian parties are turning to Hong Kong for arbitration. Should the Government seek to adopt a model for India’s proposed arbitration reform, it need not look any further than Hong Kong.

Adoption of the latest version of the UNCITRAL Model Law 

The Indian Arbitration and Conciliation Act 1996 (“Indian Arbitration Act” or “Act”) is based on the 1985 version of the UNCITRAL Model Law and is currently out of sync with international arbitration practices. The Law Commission of India in its Report No 246 (“Law Commission Report”) has recommended some amendments to the Indian Arbitration Act based on certain provisions of the latest version of the UNCITRAL Model Law (i.e. the 2006 version). The key difference between the 2006 and 1985 versions of the UNCITRAL Model Law is that the former version incorporates extensive provisions on the issue of interim relief by an arbitral tribunal and a competent court as well as the recognition and enforcement of such relief.

Hong Kong is the first Asian jurisdiction to adopt the latest version of the UNCITRAL Model Law. Its arbitration legislation, the Arbitration Ordinance (Cap. 609) (“Arbitration Ordinance”), creates a user-friendly and unitary system that applies to both international and domestic arbitrations. The Government should consider modernising the Indian Arbitration Act by adopting the 2006 version or incorporating similar provisions to provide further guidance as to how a party may seek interim relief from the arbitral tribunal or the Indian courts, and to expressly establish that such relief can be enforced in India.

Confidentiality

Confidentiality is one of the key expectations of users of arbitration.  According to Queen Mary University of London’s 2010 International Arbitration Survey: Choices in International Arbitration, 62% of the respondents said confidentiality is “very important” to them in international arbitration. The Indian Arbitration Act does not contain any provision on confidentiality regarding arbitral proceedings and awards.  Given the commonality of court intervention of arbitrations and the high frequency of arbitration related court proceedings in India, disclosure of confidential information in these public court proceedings might be a source of concern.

In contrast, Hong Kong is one of a comparatively small number of jurisdictions to have incorporated express provisions on confidentiality in its arbitration legislation. Section 18 of the Arbitration Ordinance defines the scope of a party’s duty of confidentiality and codifies a number of exceptions to such duty. Sections 16 and 17 of the Arbitration Ordinance extend the scope of confidentiality to cover arbitration-related court proceedings and judgments.  As a result of these provisions, Hong Kong offers comprehensive and robust protection of confidentiality in respect of both arbitration and related court proceedings.  If the Government considers that confidentiality is essential to arbitration in India, sections 16 to 18 of the Arbitration Ordinance are a viable model to consider.

Interim Measures

Under Section 17 of the Indian Arbitration Act, the arbitral tribunal has the power to order interim measures of protection. Notwithstanding this power, the lack of any provision in the Act for enforcement of tribunal-ordered interim relief undermines the effectiveness of such relief. As a result, Indian parties often choose to seek interim orders from the Indian courts under Section 9 of the Indian Arbitration Act. The Law Commission Report has recommended that interim measures issued by arbitral tribunals be made enforceable as court orders. However, it is unclear as to whether the recommendation applies to interim measures issued by arbitral tribunals seated outside India.

In Hong Kong, Section 61 (1) of the Arbitration Ordinance expressly provides that orders or directions made by arbitral tribunals in or outside Hong Kong are enforceable in the same manner as orders or directions of the Hong Kong court. These orders and directions include interim measures. To reduce the burden on the Indian courts and to give more teeth to interim relief ordered by the tribunal, it is imperative for the Indian Arbitration Act to expressly provide for the enforceability of interim measures made by arbitral tribunals seated in or outside India.

Pursuant to the Indian Supreme Court’s decision in BALCO, Part I of the Indian Arbitration Act does not apply to foreign seated arbitrations where the arbitration agreements were concluded on or after 6 September 2012. As the provision for interim measures under Section 9 falls in Part I of the Act, parties in foreign seated arbitrations cannot approach Indian courts for interim relief in support of foreign seated arbitrations. In this regard, the Law Commission Report recommended that Section 9 be made applicable to foreign seated international commercial arbitrations unless the parties agree to the contrary.

In Hong Kong, Section 45 of the Arbitration Ordinance empowers the Hong Kong courts to grant certain interim measures in support of arbitral proceedings whether commenced in or outside Hong Kong. In India, if the Government considers it important to provide for the courts to issue interim relief in support of foreign seated arbitrations, Section 45 provides guidance on when the courts may grant such interim relief.

Emergency Arbitrators

The use of emergency arbitrators has become popular with Indian parties. For arbitration seated outside India, the need for emergency arbitrators has found greater resonance in the post BALCO scenario, as the Indian Supreme Court prospectively excludes powers of the Indian courts to grant interim relief in relation to foreign seated arbitrations. As to arbitrations seated in India, the Indian courts are often asked to deal with applications for urgent interim relief, since the Indian Arbitration Act does not expressly recognise emergency arbitrators. The absence of a statutory recognition of emergency arbitrators raises questions regarding the enforceability of any emergency arbitrator decision in India.  Notwithstanding the Bombay High Court’s recent decision in HSBC v. Avitel where the Court issued an interim order in terms similar to an emergency arbitrator award, there is scope for legislative amendments to expressly recognise emergency arbitrator decisions in India. The Law Commission Report has made recommendations to expand the definition of “arbitral tribunal” to include emergency arbitrators and to add provisions to recognise interim relief issued by an arbitral tribunal as an Indian court order. However, it is unclear whether the recommendation applies to emergency arbitrator decisions issued outside India.

The Hong Kong Arbitration Ordinance presents an alternative approach to recognising emergency arbitrators and their decisions. Section 22A and 22B of the Arbitration Ordinance provides that any emergency relief granted by an emergency arbitrator in or outside Hong Kong is enforceable in the same manner as an order or direction of the Hong Kong Court of First Instance.  This is a separate set of provisions that states clearly the definition of an emergency arbitrator and leaves no question as to the enforceability of any emergency relief granted by an emergency arbitrator in or outside Hong Kong.  Extending the definition of “arbitral tribunal” to include an emergency arbitrator without qualifications would subject emergency arbitrators to provisions that should apply only to arbitrators, such as provisions regarding the procedure for constituting a three-member tribunal and the power of the tribunal to determine the existence or validity of the arbitration agreement.

Default Appointing Authority

In ad hoc arbitrations seated in India, if a party fails to appoint an arbitrator, an application has to be made to the Chief Justice of the High Court or the Supreme Court of India, where appropriate, to appoint the arbitrator. The time taken by the Court in making the appointment can vary and in many cases can exceed 6 to 7 months. In the dispute between Reliance Industries Ltd. and the Government over cost recovery at the KG-D6 block, the Supreme Court of India took more than a year to appoint the presiding arbitrator. This was a costly and time-consuming process which defeated the purpose of choosing arbitration to bypass courts.

Further, if the parties have not agreed on the number of arbitrators, the Indian Arbitration Act provides for the default appointment of a sole arbitrator.  This may not be suitable for certain complex and high-value cases which warrant the appointment of three arbitrators.  The Law Commission Report has recommended that the power to appoint arbitrators be transferred to the “High Court” and the “Supreme Court”. However, there is no recommendation in relation to the default number of arbitrators prescribed in the Indian Arbitration Act.

Parties to ad hoc arbitrations in Hong Kong benefit from an efficient process for appointing arbitrators by the Hong Kong International Arbitration Centre (“HKIAC”), who is designated as the default appointing authority by the Arbitration Ordinance. If a party fails to appoint an arbitrator, HKIAC will normally appoint the arbitrator within two weeks. HKIAC is designated to decide the number of arbitrators (i.e. one or three) in the absence of party agreement. When deciding this matter, HKIAC will consider factors including the dispute value and the complexity of the case.

The Government may consider adopting the Hong Kong model by amending the Indian Arbitration Act to (i) designate a reputed arbitral institution as the default appointing authority; and (ii) remove the default number of arbitrators in the Act and empower the appointing authority to determine the appropriate number in each case. Making these changes is important as the Indian courts are faced with a backlog of more than 31 million cases. Under such circumstances, it would be difficult for the courts to appoint arbitrators or to determine the number of arbitrators in a timely manner.

Judicial Support of Arbitration

In India, there has been a paradigm shift in the attitude of the Indian courts towards arbitration. Through a series of decisions such as Bharat Aluminium v Kaiser Aluminium, Shri Lal Mahal Ltd v Progetto Grano Spa, Reliance Industries Ltd v Union of India (2014) 7 SCC 603,  the Indian courts appear to be shedding their interventionist tag. However, a few recent decisions such as Associate Builders and Western Geco have muddied the waters, making it hard to predict any definite sense of direction in the Indian judicial approach towards arbitration.

The Hong Kong courts are internationally renowned for their pro-arbitration and pro-enforcement approach to arbitration.  Hong Kong judges have produced a body of non-interventionist case law that demonstrates Hong Kong’s judicial support for the arbitral process and awards. This is illustrated by the decision of the Hong Kong Court of First Instance in T v TS 2014 WL 7311 (CFI) where the court held that if a party unsuccessfully resists enforcement of or challenges an award, or seeks unsuccessfully to reopen through court proceedings an issue dealt with in an arbitration, it will pay costs on an indemnity basis unless special circumstances exist. Further, in Hebei Import & Export Corp v Polytek Engineering Co Ltd [1999] 2 HKCFAR 111, 139F the Court of Final Appeal held that the public policy exception to the enforcement of an award must be construed narrowly, and that enforcement would only be denied where such enforcement would be “contrary to the fundamental conceptions of morality and justice” of the forum.

Recent statistics amply demonstrate the pro-arbitration stance adopted by the Hong Kong judiciary. From 2011 and 2014, the Hong Kong courts did not refuse the enforcement of any awards.

The Indian judiciary should follow Hong Kong’s consistent pro-arbitration approach which is crucial to establish India as an attractive place to arbitrate.

It is understood that the Government will table proposals for amendments to the Indian Arbitration Act in the next legislative session. It is expected that the Government will follow some of the recommendations from the Law Commission Report.  By looking at the Hong Kong arbitration system, the Government can strengthen India’s current arbitration regime to ensure that it is in line with international standards.

The views expressed in this article are those of the author alone and should not be regarded as representative of HKIAC.

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This article may be cited as follows: Aditya Kurian, “Arbitration Reform in India: A Look at the Hong Kong Model”, International Arbitration Asia (21 July 2015) <http://www.internationalarbitrationasia.com/articles/arbitration-reform-in-india-a-look-at-the-hong-kong-model/>.